Refund of Accumulated ITC Allowed Even When Input and Output Goods Are the Same: Karnataka HC

The Karnataka High Court has allowed the refund of accumulated Input Tax Credit (ITC) even when input and output goods are the same. The bench of Justice S.R. Krishna Kumar has observed that refund of accumulated Input Tax Credit (ITC) under an inverted duty structure cannot be denied merely because the input and output goods are the same. The bench directed the tax authorities to grant refund to South Indian Oil Corporation, setting aside the impugned orders rejecting its claim. The dispute before the High Court of Karnataka arose from the rejection of refund claims filed by South Indian Oil Corporation under Section 54(3)(ii) of the CGST Act, 2017. The writ petition challenged the orders passed by the adjudicating authority and the appellate authority, which had denied refund of accumulated Input Tax Credit (ITC) on the ground that the input and output goods were the same. South Indian Oil Corporation is engaged in the business of procuring edible oils such as sunflower oil, rice bran oil, cottonseed oil and palm oil in bulk quantities. These oils fall under HSN Code 15 and attract GST at 5 percent. The company purchases the oils in bulk tankers and thereafter repacks them into smaller retail containers of varying sizes at its premises. The repacked oils are sold to both business customers and retail consumers, and the outward supply also attracts GST at 5 percent under the same HSN classification. Although the principal input (bulk edible oil) and the outward supply (packed edible oil) were taxed at the same rate of 5 percent, the company accumulated unutilised ITC because several ancillary inputs used in the course of its operations attracted higher GST rates. These included packing materials, labels, printing materials, repair and maintenance materials, and other operational inputs which were taxed at 18 percent or higher. As a result, the rate of tax on certain inputs was higher than the rate of tax on the output supply, leading to accumulation of credit. Invoking Section 54(3)(ii) of the CGST Act, which permits refund of unutilised ITC where credit has accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies, the petitioner filed refund applications for various tax periods. The proper officer issued show cause notices proposing rejection of the refund claims. The department relied on Circular No. 135/05/2020-GST dated 31 March 2020, which had clarified that refund would not be admissible where the input and output supplies were the same. The adjudicating authority rejected the refund claims on this basis, holding that since the bulk oil and packed oil were the same goods taxed at the same rate, the case did not fall within the scope of inverted duty structure. The appellate authority upheld this reasoning and dismissed the appeals filed by the petitioner. Aggrieved by these orders, the petitioner approached the High Court under Articles 226 and 227 of the Constitution. Before the Court, the petitioner argued that Section 54(3)(ii) does not contain any restriction denying refund merely because the input and output goods are the same. The provision only requires that credit must have accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. It was emphasized that the term “inputs” is used in the plural and includes all inputs used in the course of business, not merely the principal raw material. Therefore, even if the main input and output were taxed at 5 percent, the higher tax on other inputs would entitle the petitioner to refund. The petitioner further contended that a circular issued under Section 168 of the CGST Act cannot override or curtail the plain language of the statute. If Section 54(3)(ii) does not prohibit refund in such circumstances, a circular cannot introduce such a restriction. It was also pointed out that Circular No. 135/05/2020 was subsequently modified by Circular No. 173/05/2022-GST dated 6 July 2022, which deleted the restrictive clause that barred refund where input and output supplies were the same. According to the petitioner, this substitution was beneficial and clarificatory in nature and must therefore apply retrospectively. Reliance was placed on the decision of the Delhi High Court in Indian Oil Corporation Ltd v. Commissioner of CGST, where it was held that refund under Section 54(3)(ii) cannot be denied merely because the principal input and output goods are identical, so long as credit has accumulated due to higher tax on other inputs. On the other hand, the Revenue contended that the case did not involve an inverted duty structure because the bulk oil and packed oil were the same goods and attracted GST at the same rate of 5 percent. It was argued that the higher tax on ancillary inputs was not sufficient to bring the case within the ambit of Section 54(3)(ii). The department maintained that it had correctly followed the binding circular in rejecting the refund claims. Thus, the dispute centered on the interpretation of Section 54(3)(ii), the scope of the expression “inputs,” and the legal validity of relying on a circular to restrict refund eligibility. The arguments placed before the Court raised broader questions about the interplay between statutory provisions and administrative circulars, as well as the proper understanding of inverted duty structure under the GST regime. The High Court held that refund under the inverted duty structure cannot be denied merely because input and output goods are the same. The substituted circular removing the restriction applies retrospectively. The orders rejecting the refund were arbitrary and unsustainable in law. The Court set aside the appellate and original orders and directed the authorities to grant refund of accumulated ITC to the petitioner. Case Details Case Title: South Indian Oil Corporation Versus The Assistant Commissioner Central Tax Citation: JURISHOUR-46-HC-2026(Kar) Case No.: WRIT PETITION NO. 22068 OF 2024 (T-RES) Date: 12/12/2025 Counsel For Petitioner: Venkatanarayana G.M., Advocate Counsel For Respondent: Akash B. Shetty, Advocate Click Here To Read Order Read More: Appeal Filed Within Limitation Must Be Heard on Merits; Later Pre-Deposit Cannot Lead to Rejection as Time-Barred: CESTAT

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